Wednesday, July 17, 2024

OPINION AND ANALYSIS | 13-07-2019 09:21

What Washington and Wall Street really think about Argentina and Macri

If the Fernández-Fernández ticket takes a six to seven percentage-point lead over the Macri-Pichetto duo in the PASOs, investors will run for the hills.

As fragile as ever, Argentina’s economy has stumbled into some respite as of late, an issue that is being closely followed in the United States. While the fate of the second-largest economy in South America isn’t all that important for Donald Trump, he understands the importance of guaranteeing a second term for his personal friend Mauricio Macri, in the context of an attempt to eradicate leftist populism from the Western Hemisphere. Thus, the US pushed for the International Monetary Fund (IMF) to extend Argentina its largest-ever emergency loan, and has acknowledged the real possibility of further IMF programmes for the nation, assuming a continuation of current policies — which means Macri needs to defeat Cristina Fernández de Kirchner’s ticket in this year’s elections.

If this happens, Wall Street could partake in a feeding frenzy while investments in the productive economy would begin to come in. At least US$4.5 billion is already committed in direct investments, mainly in the energy sector. Alberto Fernández’s Peronist envoys have held meetings with high-ranking officials in Washington “in order to prove they are not crazy,” according to one source, even though US officials – and their counterparts at the IMF and the World Bank – don’t seem too convinced the current focus on austerity and pro-market policies will enjoy continuity. While, speaking frankly, our country’s strategic importance is low in the list of priorities for the Trump administration, there’s definitely a geopolitical and commercial interest in a second term for President Macri.

During a visit to Washington organised by the American Chamber of Commerce in Argentina, I had a series of off-the-record meetings with high-ranking officials from the US State Department, US Treasury, World Bank, the Argentine Embassy, investment banks, journalists, and US companies with interests in Argentina. We also had the chance to meet informally with members of the IMF and debate with academics focused on the country. Overall, I would say there’s a cautious optimism about Argentina, stemming from an expectation that the tepid recovery will be sustained, leading to the final defeat of Kirchnerismo in the country. This is not only important geopolitically, it would also benefit Trump electorally as one of his main campaign messages will point to the futility of socialism, using Nicolás Maduro’s Venezuela as a prime example of its failure.

Economists at major Wall Street banks have been looking closely at the recent economic and electoral scenario and have pinpointed three major risk factors for Argentina. In other words, any of these would trigger sell-offs in Argentine sovereign bonds, which in turn would spark a dumping of Argentine stocks, a spike in the ‘riesgo país’ country risk indicator and most probably lead to the political demise of the ruling coalition’s ambitions.

All of these are contingent, of course, on the fact that given Argentina’s structural deficits and its incapacity to generate enough dollars to defend the peso against a run on the currency, its relatively limited reserves, and the reigning anxiety that dominates anything related to peso-denominated assets these days, any exogenous shocks would lead to a “game over, enter coin” scenario for Macri. A Fed rate-hike, the intensification of the US-China trade war, actual combat in the Strait of Hormuz, extreme weather... you name it, and Macri’s done.

If the Fernández-Fernández ticket takes a six to seven percentage-point lead over the Macri-Pichetto duo in the August PASO primaries, investors will run for the hills, understanding the lead is insurmountable. If the spread was low, but Cristina’s candidate makes it above 40 percent, they would jump ship. And if former economy minister, and self-proclaimed Marxist, Axel Kicillof were to beat María Eugenia Vidal in the Buenos Aires Province — “the mother of all battles” — major funds would lose all hope of recovering their investments in the beleaguered nation, meaning a writedown and financial chaos.

A few indicators make their optimism clear. The first is the stability of the peso-dollar exchange rate, a consequence of intensely restrictive monetary policy, persistent dollar selling by Guido Sandleris’ Central Bank, and a previous sell-off which, in part, is a consequence of the intense dollarisation of portfolios. “There is no chance the peso-dollar can go to 100,” an economist explained. There is even a risk that the peso is overvalued, which is troubling given the potential of a future shock. Yet, peso stability has helped push the rate of inflation rate into the 2.5-percent region, which is a key turning point for activity to begin to take off. A positive trade balance, the consequence of tanking imports, and the first signs of “green shoots” or slightly positive macroeconomic indicators, have given Macri some breathing room. The free-trade agreement signed between Mercosur and the European Union is another indicator of normalisation for Wall Street, which together with the apparent trough in the recession has helped Macri gain in opinion polls. (While a trade agreement with Mercosur has been discussed in Washington, it is a long-shot and there is little chance of an opening up of key US markets in the agricultural and energy sectors).

While the April Isonomía poll, putting CFK’s ticket in the lead in a hypothetical run-off, sparked “the fear,” the average spread between Macri and Alberto including 17 polls that have come out since the beginning of June is at 3.3 percent for the first round, in Fernández’s favour. Macri’s recovery even has him leading in the latest Management & Fit survey with 38.6 percent of the vote against Fernández’s 38.5 percent. This has translated into numerous market events for Argentina in recent weeks, with several private bond offerings and even rumours of an upcoming IPO. The attractiveness of Argentina is, of course, the Vaca Muerta field in Patagonia, which could make the country a global gas powerhouse. In order for this to happen though – and it is not guaranteed that it will – the whole of the energy sector needs to come together, sink the capital to generate the proper infrastructure, and make sure Argentina’s natural gas prices are competitive with US production.

It is unquestionable that Macri has been extremely successful in re-integrating Argentina into the global community. This, and the relations developed across all levels of multilateral organisations and Washington agencies, is the key factor behind the financial support it’s receiving from the US. Add in geopolitics and the Macri-Trump relationship, and it means many in Washington are doing what they can (within their own preconceived notions of what the world should look like) in order for Argentina to succeed. Christine Lagarde’s departure from the IMF shouldn’t modify its position on Argentina, nor its predisposition to flexibility. Being owed nearly US$60 billion, it is important from a reputational standpoint for the Fund, and the Treasury, that the Macri experiment succeeds. Will they renegotiate? Absolutely, as long as it occurs through the Fund’s own mechanisms. Will they free up more cash? Quite possibly, as there are several cases of nations needing several IMF programmes to succeed. “The Fund will get its money back,” they note in DC. But even if Macri does take the election, and positive capital flows come in, it will take some time for the trust of “real investors” to allow them to sink in direct capital into the productive economy.

And what about 2020? “We should be asking you that question,” several of them said.

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Agustino Fontevecchia

Agustino Fontevecchia


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